On August 22, 2023, the Bureau of Land Management (BLM) will hold its first in-person informational meeting on a new proposed oil and gas leasing rule. The proposed rule would codify reforms made by Congress in the Inflation Reduction Act (IRA) and the Infrastructure, Investment and Jobs Act (IIJA) – including raising the royalty rate, rental rate, and minimum bid – as well as implement new reforms, such as changes to federal bonding requirements.

The proposed rule was released in late July and will be open for comments through September 22. During this time, BLM plans to hold 5 informational meetings: a virtual meeting on August 14; an in-person meeting in Albuquerque, NM on August 22; an in-person meeting in Denver, CO on August 29; an in-person meeting in Salt Lake City, UT on September 12; and a virtual meeting on September 19.

New Mexico is the largest producer of oil and natural gas on federal lands and the location of the agency’s first in-person informational meeting on the new rule. Last year, oil and gas operators in New Mexico accounted for 74% of all oil (354 million barrels) and 46% of all gas (1.67 trillion cubic feet) produced on federal lands. The state currently has 4.3 million acres of federal land leased for oil and gas production – the second most leased acreage in the country, behind Wyoming.

While this production generates financial returns for federal and New Mexico state taxpayers, outdated leasing and bonding policies have left billions of dollars in potential revenue on the table and saddled taxpayers with billions of dollars in potential clean up liabilities.

Outdated Leasing Terms Cost New Mexico Valuable Revenue

A recent Taxpayers for Common Sense report on federal oil and gas leasing in New Mexico documents how taxpayers have lost more than $8 billion in potential revenue from outdated leasing fees, most notably a below-market royalty. Over the last decade, oil and gas produced on federal lands in New Mexico were charged a royalty rate – a percentage of the value of sold oil and gas that producers must return to federal taxpayers – of 12.5%. This rate was not only lower than what is charged in federal waters (18.75%) but also lower than what was charged on neighboring state land in New Mexico (between 18.75% and 20%).

The proposed rule would codify the 16.67% royalty rate update in the IRA, securing it as the royalty rate until August 2032. If a royalty rate of 16.67% had been imposed on oil and gas production in New Mexico over the last decade, taxpayers would have received an additional $5.4 billion in revenue.

After August 2032, the proposed rule would set 16.67% as the minimum royalty rate, giving BLM the opportunity to raise it to a higher level. The Department of the Interior (DOI) has previously set higher rates; in June 2022, DOI held an oil and gas lease sale that included a royalty rate of 18.75% specific to those leases. Had a royalty rate of 18.75% been imposed on oil and gas production in New Mexico over the last decade, taxpayers would have received an additional $8 billion in revenue.

The proposed rule would also codify other reforms to the onshore federal leasing system, including raising the minimum bid and rental rates, eliminating noncompetitive leasing, and implementing an expressional of interest fee.

Low Bonding Rates Create Mounting Reclamation Liabilities for New Mexico and Federal Taxpayers

After production ends, oil and natural gas producers operating on federal land are required to plug their wells and clean up the surrounding sites. To ensure this cleanup is paid for by operators, not taxpayers, DOI requires lessees to post a bond. But current bonding requirements are inadequate and have failed to protect taxpayers from shouldering the cost of cleaning up wells in New Mexico.

The average value of bonds held by DOI in 2019 was just $2,122 per well whereas reclaiming orphaned wells in New Mexico costs an average of $35,600 per well, leaving taxpayers to cover the shortfall. By our estimates, currently producing oil and gas wells on federal lands in New Mexico, if abandoned, would cost taxpayers more than $1 billion to reclaim.

The proposed rule would increase the minimum lease bond amount from $10,000 to $150,000 and the minimum statewide bond from $25,000 to $500,000, and eliminate nationwide and unit bonds. These reforms would better protect taxpayers from shouldering the oil and gas industry’s liabilities.

For more information on the federal onshore oil and gas leasing system, check out the additional resources below:

• New Mexico’s Boom That Cost Billions II – How Federal Oil & Gas Policies Continue to Fail Taxpayers: Report on how outdated leasing terms in New Mexico have cost taxpayers billions of dollars in lost revenue, wasted valuable energy resources, and left taxpayers with additional environmental liabilities.
• Department of the Interior New Rule on Oil and Gas Leasing: Analysis of how DOI’s proposed rule would codify recent reforms and updates bonding requirements.
• Scoring on Oil and Gas in Reconciliation: Analysis of fiscal onshore leasing reforms implemented in the Inflation Reduction Act (IRA).
• Federal Onshore Oil and Gas Leasing Process 101: Background information on the process for selling and managing leases for publicly owned oil and gas.

• Oil and Gas Bonding on Federal Land: Factsheet on the federal minimum bonding requirements for the onshore federal oil and gas leasing system.
• Public Meetings on Proposed Rule: The Bureau of Land Management’s informational meeting schedule.